Business context and reporting period
Public Storage filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The REIT primarily owns and operates self-storage facilities, generally leased month to month. At quarter-end it had interests in 2,468 U.S. facilities across 38 states, with approximately 167 million net rentable square feet. It also held approximately 35% of Shurgard and 42% of PS Business Parks (PSB).
Key financial metrics
Amounts below are in U.S. dollars; figures are rounded to millions unless noted.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $729.3m (+3.3%) | $706.4m | $2,129.3m (+3.3%) | $2,061.8m |
| Net income | $399.4m (+5.2%) | $379.6m | $1,138.6m (+0.8%) | $1,129.3m |
| Net income allocable to common shareholders | $337.4m | $322.7m | $945.5m | $958.8m |
| Diluted earnings per common share | $1.93 | $1.85 | $5.42 | $5.50 |
| FFO per diluted share (non-GAAP) | $2.76 | $2.66 | $7.86 | $7.68 |
| Core FFO per share (non-GAAP) | $2.73 | $2.70 | $7.90 | $7.75 |
Self-storage same-store revenue rose 1.1% in Q3 and 1.5% year to date; same-store NOI changed -0.9% and +0.2%, respectively. Same-store occupancy averaged 94.2% in Q3 (93.8% in 2018) and 93.6% year to date (93.3%). Q3 same-store cost of operations increased 6.4%, outpacing revenue growth; marketing expense rose 69.5% and property taxes 4.9%. The same-store gross margin before depreciation was 72.0% in Q3, versus 73.5% a year earlier.
Cash from operations was $1,567.7m for the first nine months, versus $1,571.5m in 2018. Net cash used in investing was $670.7m (2018: $354.7m), reflecting greater acquisitions; net cash used in financing was $716.4m (2018: $1,217.6m). Cash and equivalents were $541.4m at September 30, up from $361.2m at year-end 2018; including restricted cash, the balance was $564.7m.
Notes payable had a $1,892.4m book value ($1,901.1m principal) at quarter-end, up from $1,412.3m at December 31, 2018. The company issued $500m of 3.385% senior notes in April. Weighted-average effective debt rate was 2.9%; there were no revolver borrowings, and $484.1m of capacity remained available after letters of credit. The company reported compliance with debt covenants and no substantial debt principal maturities before 2022. Total assets were $11,413.9m and total equity $8,789.0m.
Material changes versus prior comparable periods
- Q3 diluted EPS increased to $1.93 from $1.85, supported by higher self-storage NOI, a $13.0m year-over-year increase in foreign-exchange gains, and lower G&A expense. The latter partly reflects $7.1m of incremental 2018 share-based compensation for former senior executives’ planned retirement. A $9.1m preferred-share redemption allocation to preferred holders partly offset the gains.
- Nine-month diluted EPS declined to $5.42 from $5.50. Contributing factors included the absence of $34.9m of PSB-related gains recognized in 2018 and $26.5m of preferred-share redemption allocations in 2019; higher self-storage NOI and lower G&A partly offset these items.
- Same-store performance was mixed: occupancy and realized rent per occupied square foot improved, but operating costs—especially marketing and property taxes—grew faster than revenue. Management attributed slower revenue growth partly to softer demand and additional storage supply.
- Preferred-share activity included the issuance of Series H and Series I shares and redemption of Series Y and Z. Series U, with $287.5m liquidation value, was called for redemption at September 30 and redeemed October 15, 2019. Redemption-related income allocations reduced income allocable to common shareholders.
- Acquisitions and development expanded the portfolio: during the first nine months the company acquired 32 storage facilities and one commercial facility for total cost of $318.5m, and opened developed or expanded facilities adding 3.2m net rentable square feet.
Outlook, commentary, risks and unusual items
The filing gives no specific earnings or FFO guidance. Management described current same-store trends as consistent with continued moderate revenue growth for the remainder of 2019, while cautioning that trends are volatile and future growth is uncertain. It expects growth to rely substantially on rent increases to existing tenants. Management expects property-tax expense to grow approximately 5% and marketing expense to continue increasing in the remainder of 2019; it also cited labor-market and wage pressures. It expects 2019 maintenance capital expenditures of approximately $210m.
Management estimated approximately $1.3bn of capital resources over the next year, compared with identified needs of approximately $705.5m. Resources included $541.4m cash, $484.1m available revolver capacity and $200m–$250m of expected retained operating cash flow. Identified needs included the $287.5m Series U redemption, $69.6m of acquisitions under contract and $348.4m remaining spending on the development pipeline, primarily over the next 18 months. The Board declared a $2.00-per-share common dividend for payment in December 2019.
Principal risks cited include heightened self-storage competition and new supply, particularly in markets including Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York and Portland; local demand and economic conditions; development and acquisition execution; rising property taxes, wages and marketing costs; and foreign-currency exposure through Shurgard and euro-denominated debt. The filing also flags possible California property-tax changes related to a potential 2020 ballot initiative, REIT qualification and regulatory risks, natural disasters, insurance exposure, and cyber and litigation risks. Management said material loss from current legal proceedings was remote, reported no material off-balance-sheet arrangements, and recorded no impairment charges in the periods presented.
Unusual items affecting comparisons include currency translation gains of $15.6m in Q3 and $18.1m year to date, and the prior-year PSB real-estate gains. These gains and preferred-share redemption allocations affect reported earnings and are excluded from the company’s Core FFO measure under its definition.
Important facts for investors to verify
- Whether same-store revenue growth can persist as new supply and softer move-in demand pressure rental rates, and whether occupancy remains strong.
- Whether marketing, property-tax, payroll and other operating-cost increases continue to outpace revenue growth and pressure same-store NOI margins.
- Actual spending, completion timing and stabilization of the development pipeline, including the remaining $348.4m estimated cost and projects subject to approvals.
- Debt maturities, refinancing costs and liquidity assumptions, including expected retained cash flow and availability of the revolver.
- The effects of preferred-share redemptions and replacement financing on distributions and common-share earnings; distinguish GAAP EPS from FFO and Core FFO, which are non-GAAP measures.
- Foreign-exchange effects on Shurgard earnings, the investment balance and euro-denominated debt, along with material developments in the risks identified by management.